European equity funds extended their record stretch of outflows, with money that has left the asset class over the previous 36 weeks now approaching $100 billion, while the relatively high returns on offer in emerging market funds continued to attract investment, Bank of America Merrill Lynch said on Friday.
Bond funds posted yet another weekly inflow, but BAML’s data showed that investors are gradually shifting out of longer-term bonds towards shorter-term bonds, a move reflected in the recent spike in longer-dated yields to the highest in months.
European equities have fallen out of favour among foreign investors this year as sluggish earnings growth, an uncertain economic outlook on the back of Britain’s vote to leave the European Union and worries over the profitability of the region’s banks have soured the mood.
Investors pulled $1.1 billion from European equity funds in the week to Oct. 12, BAML said, citing EPFR Global data, marking the 36th straight week of outflows and a stark contrast to emerging market equity funds.
Investors poured $2.5 billion into these funds, the most in two months and the 14th weekly inflow of the past 15 weeks. The $900 million inflow into EM debt funds – the 15th in a row – brought combined inflows into EM equity and debt funds over the past three months up to $52 billion.
Bond funds drew a $2.6 billion net inflow in the latest week, but a shift within that headline figure was underway. ‘Long-duration’ bond funds saw redemptions for the seventh straight week, and investors’ reference for ‘short-duration’ bonds over long bonds was its strongest in two years.
BAML said this was a “clear reflection” of growing investor worries about a possible U.S. interest rate hike soon, the Bank of Japan announcing changes to its policy recently and speculation that the European Central Bank might tweak its policy soon too.
Overall, global investor sentiment is neither too bearish nor too bullish – or in “goldilocks” territory – BAML said, as fund flows continue to show a preference for bonds and emerging markets.